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Insolvency and bankruptcy get worse

The number of people going insolvent in England and Wales edged up by 2.5% in the first quarter of this year, as experts warned there is still "no light at the end of the tunnel" for many families despite the recovering economy.

Some 24,931 individual insolvencies were recorded over the latest three-month period, which is 2.5% higher than the fourth quarter of 2013 but is still 0.3% down on the same period a year ago.

A growing number of people going bankrupt helped to push up the figures.

Bankruptcies tend to be seen as a "last resort" and their use has been in general decline in recent years, but the latest figures showed a 4.8% increase in their number compared with the previous quarter.

Some 5,671 bankruptcies were recorded in the first quarter of this year.

Charles Turner, chairman of the Insolvency Practitioners Association (IPA) and a partner at FRP Advisory, said that many people are still seeing their income struggling to keep up with their outgoings.

He warned: "For a lot of consumers there is no light at the end of the tunnel and they will need to deal with their personal debt crisis by opting for a personal insolvency solution."

Previous figures released by the Insolvency Service have shown that across last year, the number of people being tipped into personal insolvency fell to its lowest annual levels since 2005, with just over 101,000 cases recorded for the whole of 2013, with low interest rates helping to keep borrowers' payments down.

Despite its latest figures showing a recent upturn in bankruptcies, the number of orders made due to this type of personal insolvency is still 15.0% lower than it was in the first quarter of last year and bankruptcy numbers have been running at their lowest levels in a decade for some time.

The two other formal types of personal insolvency are debt relief orders (DROs) which are often dubbed "bankruptcy light" because they are aimed at people with relatively low amounts of debt but no realistic prospect of paying it off, and individual voluntary arrangements (IVAs), which are agreements with creditors to pay all or part of the debts.

The Insolvency Service's figures showed that at 6,549, the number of DROs was 9.3% lower in the first quarter of 2014 than it was during the same period a year earlier.

But the number of people taking out IVAs has lifted by 14.3% on a year ago, with 12,711 cases recorded. IVAs usually involve regular payments being made over a five-year period to an insolvency practitioner, who divides them up between creditors.

Giles Frampton, president of insolvency trade body R3, said that the first quarter of the new year usually sees the number of personal insolvencies climb as people tend to put off dealing with their debt problems until after Christmas.

He said that the expense of becoming officially insolvent means that a lot of people are being "forced" down the route of informal types of insolvency.

Mr Frampton said: "It's important to understand that the official statistics do not tell the full story about insolvency in England and Wales. The Debt Management Plan (DMP) industry has ballooned in size in recent years, but the number of people in DMPs remains unknown."

Mr Frampton said he has also noticed IVA plans with "lower and lower" cash amounts from people's incomes being put towards them in regular payments.

He said: "People just can't afford to pay more."

In the past, people might have had £200 to £250 in surplus income a month which they could put towards their IVA repayments, but in some cases they now only have around £50 to put towards them, R3 said.

Mr Frampton said: "Although we may not see a new upward trend in insolvencies in the short-term, there is still plenty of pressure on personal finances.

"Wage growth is finally keeping pace with inflation, but this won't have an immediate impact. A rise in interest rates would add further pressure to borrowers' personal finances."

Peter Tutton, head of policy for StepChange debt charity said: "W e know that millions of households' finances have been stretched to breaking point and that many are using credit simply to make ends meet.

"In this context we need to ensure that those people facing short term financial difficulty are given breathing space to stop debts spiralling to the point where insolvency becomes the only option."

Joanna Elson, chief executive of the Money Advice Trust, said the charity has concerns that the increase in IVAs is not reflective of the types of debt problems people find themselves in, "but rather of the way in which many debt management companies can most effectively generate income".

She said that anyone who is struggling should seek free, impartial advice.

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